The Green Sheet Online Edition
February 11, 2008 • Issue 08:02:01
Are you prepared for the big R?
In a January 2008 press release, American Express Co. stated it saw signs of a weaker U.S. economy "as card member spending began to slow, and delinquencies and loan write-offs trended upward during December." And media headlines indicate we might be headed into a recession (that awful R word) or something very close.
I have always boasted that our industry is recession proof, but as we've experienced weaker economic conditions, I've wondered, is this so?
In good times, consumers use their debit cards because they have cash in the bank. On the doorstep of a weak economy, however, consumers start relying on credit cards because their bank balances are decreasing.
Ccguy on GS Online's MLS Forum stated, "While people will spend less, credit card usage should go up. ... So a recession is good, and when the economy is good our business is good. As long as plastic is being used, business is good for our business."
So, will the recession not affect us? This is the billion dollar question. What happens when consumers cannot afford to pay off their credit card balances, and their available credit is reduced? They can't spend.
And what does this portend? Marc Scheipe, Managing Partner at FrontStream Payments, spent an hour helping me understand the likely impact, and the MLS Forum provided much insight, too.
Don't assume we're immune
MLS Forum member Mike Maxon said, "I have seen the results of recession on our industry over the last 25 years or so. There is no doubt that every recession has had an impact on everyone that markets merchant accounts. ... This time around there is an added effect on all business formations because of the lack of easy capital.
"The business formation explosion over the last 10 years was fueled by home equity loans and rapid increases in home values. This easy, low-cost capital source actually pulled people from the standard work force and encouraged them to try out small businesses.
"This capital source shut down about eight months ago and the resulting drop in new business formations is the clear result."
Stay on your toes
So what are the sure signs of recession? According to Maxon, look for the following:
- Fewer new business formations
- More business failures
- Increased merchant portfolio attrition, known to some as increased automated clearing house (ACH) rejects
- Lower average income per merchant
- Tighter merchant underwriting requirements
- Increased merchant fraud
- Lower merchant portfolio valuations
- More ISO failures
Other facets of the industry may also be affected. MLS Forum member Beanstream stated, "I think that another important impact of a potential recession will be the extent to which many organizations undertook debt over the past few years in order to finance growth and expansion.
"I have no doubt that the Fed will continue to lower interest rates if they continue to see weakness in the economy, but this will not provide short-term assistance to companies that face the double whammy of high debt servicing costs (due to tighter financing controls) along with reduced revenue and earnings from operations (due to a slowdown in the economy).
"There is a very real risk that some of these companies may have to undergo restructuring or a sale in order to adjust. This will lower company (not just portfolio) valuations and further impact the ability to grow a business in our industry."
And the valuation process will impact the industry as a whole.
Make savvy choices
No matter what side of the argument you are on, take proactive measures to ensure your survival in case the big R is coming. I have always preached a diversified portfolio, but targeting certain business types or SIC codes (standard industrial classification codes established by the U.S. government) is equally important.
At Impact PaySystem, we have introduced a product (health insurance verification/eligibility) that will help us to get into the medical industry.
We believe the health care sphere may not be affected as much by a slower economy. Some of the other industries that will likely prosper in a downturn include automobile service providers, pawn shops and grocery stores.
The most important factor is to be educated on what is happening around us. Don't think for a minute that if the economy continues to be lackluster, you won't be affected. Chances are we all will, and we need to be highly proactive in the coming year.
Start writing your deals in a way that will give you more security. For example:
- If you don't usually have a monthly minimum, make sure to implement one.
- If you've been waiving your termination fee, reinstate it in your agreements.
- Make sure you charge an ACH reject fee. I've seen agents cross this out in contracts, thinking it will help them get deals; this is not the time to do that.
- Don't take on risky deals if you're not sure you'll cover your costs. Do the math ahead of time, and acquire profitable accounts.
It's time to buckle down. The big guys in our industry are doing this already. I hope discussing this subject will help us gear up for a rainy day. But let's hope we get refreshing sun showers, not torrents pouring down in heavy winds.
Dee Karawadra is the founder, Chief Executive Officer and President of Impact PaySystem, based in Memphis, Tenn. He and his team have a wealth of knowledge on the merchant services industry, with a niche in the petroleum market. Dee's experience on the street as an agent has guided him in laying a foundation for an agent program that is both straightforward and lucrative for his agents. Contact him at 877-251-0778 or email@example.com.
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